By Mark Zupan
Our nation is flirting with resurrecting inflation to levels that are reminiscent of the grim 1970s. A high rate of inflation will, among other things, penalize savers, pensioners and working people, whose raises and cost-of-living adjustments -- if they get them -- cannot keep up with rising prices.
The root cause of the coming inflation is the Federal Reserve’s easy-money policy in support of the federal government’s stimulus efforts. Rising government spending has been rapidly swelling our debt (now more than $14 trillion). Moreover, the Fed’s actions work to erode the U.S. dollar’s purchasing power. Over the past three years, the dollar has been devalued against many leading currencies, with the notable exception of the troubled euro. A weak dollar means imports become more expensive.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In addition, with more dollars now chasing fewer goods and services, the prices of those goods and services have begun to rise. Based on producer-price increases registered so far this year, we could see consumer prices increasing at a 6%-plus clip later this year.
All of this is occurring as banks sit on $1 trillion of reserves that they have not loaned out. Once they feel more confident about lending and this money hits the economy, it will add to inflationary pressures.
Some people say that inflation is not a risk because of slack employment and because the consumer price index has been rising only modestly. However, the core CPI excludes food and energy -- goods that are used by every household.
Oil prices are especially vulnerable to further spikes because of the turmoil in the Middle East and North Africa. Given that Libya accounts for 2% of the world’s oil supply and that other still-feudal governments in the Middle East are under growing pressure to democratize, the near-term potential for explosive increases in oil prices is real.
Any such shocks will translate into rising prices for food and other goods and services. That will only exacerbate the inflationary pressures that our monetary policymakers have set in motion.
What’s your take? Please join the discussion about inflation on our Facebook page or in the comment box below.
Economist Mark Zupan is dean of the Simon Graduate School of Business, University of Rochester.
GO BACK TO OUR INFLATION DEBATE MAIN PAGE: WILL INFLATION TAKE OFF?
-
Stock Market Today: The Dow Adds 15 Points To End Its Losing StreakEquity indexes opened higher but drifted lower as markets priced in new Fed forecasts.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Europe Faces Economic and Political Headwinds Next YearThe Letter Challenges for Europe: Potential tariffs, high energy prices and more competition from China will weigh on the bloc in 2025.
-
Don't Sleep on Japan's Economic TransformationThe Letter After almost three lost decades, Japan — one of the world's biggest economies — is finally showing signs of life.
-
Kiplinger Outlook: Telecom Companies Brace for Tough TimesThe Letter The telecom industry is entering a new era that threatens profitability. But the coming Trump administration will make it easier for the major players to adjust.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
China's Economy Faces Darkening OutlookThe Letter What the slowdown in China means for U.S. businesses.
-
AI Start-ups Keep Scoring Huge SumsThe Kiplinger Letter Investors continue to make bigger bets on artificial intelligence start-ups, even for small teams with no revenue. Some backers think a startling tech breakthrough is near.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
